I'm Political Economy editor at Forbes, editor of RealClearMarkets.com, plus a senior economic advisor to Toreador Research & Trading. I have book on how the economy works, Popular Economics: What LeBron James, the Rolling Stones and Downton Abbey Can Teach You About Economics that is set for release in April of 2015. I have a weekly column on Mondays at Forbes.com.

Wake Up Republicans, Rising Federal Revenues Are A Very Bad Thing

U.S. Speaker of the House Rep. John Boehner (R-OH) (4th L) speaks during a news conference to introduce the House Republican leadership for the next Congress November 14, 2012 on Capitol Hill in Washington, DC. (Image credit: Getty Images via @daylife)

Amid the ongoing “fiscal cliff” battle, a popular argument about tax revenues has been reintroduced by Republican-leaning commentators. Eager to disarm facile Democratic proposals meant to erase federal deficits through higher tax rates levied on top earners, conservative pundits have published voluminous commentary and stats showing that income tax increases on the rich don’t produce the revenues desired.

In USA Today, Michael Medved wrote that “The problem with this odd wave of high tax nostalgia is that it ignores one crucial fact about the Eisenhower era: Higher tax rates on a few wealthy taxpayers didn’t produce higher revenues.” Writing inInvestor‘s Business Daily, the great Thomas Sowell noted that “under both Republican President Calvin Coolidge and Democratic President John F. Kennedy, high-income people paid more tax revenues into the federal treasury after tax rates went down than they did before.” They did this despite lower tax rates because “Under these conditions, higher tax revenues can be collected by the government, even though tax rates are lower.”

There’s a great deal of evidence showing the above to be true. Whether the 1920s, 60s or 80s, tax revenues increase in concert with top earners accounting for a rising percentage of federal receipts whenever the headline tax rate on the rich declines. So while the argument is hard to argue with, it’s also very dangerous.

Indeed, seemingly forgotten by Republicans is a truth they at least pay lip service to about the horrors of government wrought by rising federal spending. Though we might wish otherwise, when federal revenues spike they rarely go toward paying off debt. Instead, the funds are used by the political class to either expand existing programs, or to introduce new ones. Spending is oxygen to politicians, and growing revenues represent a gusher of fresh air. More to the point, the self-proclaimed party of limited government promotes bigger government through taxation schemes billed as revenue enhancers.

Considering new federal programs, one certainty about them is that once funded, they’re difficult to sunset. Rising federal revenues don’t just give us big government in the near term, they also ensure an ever larger Washington down the line as the size of newly conceived programs increases. These programs weigh on economic growth for federal spending always and everywhere increasing at the certain expense of the private sector. Unknown is how many of tomorrow’s Microsofts and Intels will never see the light of day thanks to the federal government being the recipient of so much limited capital that it will surely consume. Unfortunately, the story gets worse.

Conservatives and Republicans frequently talk about how federal poverty programs increase dependency among the poorest, but not spoken of enough is how a flush federal government fosters a similar dependency among increasingly well-to-do government workers. Thanks to rising federal revenues aggressively spent by both political parties, federal employment is no longer a short-term public-service sacrifice. Instead, it’s well paid work that ends with well-compensated retirement. Unknown is what the economy will lose due to “golden handcuffs” of the federal variety that make otherwise productive workers dependent on growing federal paychecks over seeking their living in what used to be a more highly compensated private sector.

Looked at in light of federal deficits alone, surely one reason our deficits are so big has to do with a tax code that’s proven so capable of vacuuming up record tax receipts. Many conservatives decry deficits yet fail to draw the obvious correlation between annual federal revenue increases and the ability of Congress to deficit spend. Simply put, an effective tax code from a revenue standpoint facilitates the very deficits that keep conservatives up at night. Tax plans that boost federal receipts ensure large budget deficits as far as the eye can see, not to mention a federal government whose size will continue to astound.

Just as rising federal revenues work at cross purposes with efforts to shrink the size and scope of government, the empirical reality that top earners foot a growing portion of Leviathan’s bill is similarly disturbing. Not asked enough is why it’s a positive that the rich increasingly pay for everyone else.

Implicit in this reasoning is the unsupportable view that we benefit from a federal government flush with cash, and that because we do, the rich owe us their productivity so that the government has sufficient means to grow. Considering the former, conservatism’s success in the U.S. has to a high degree been a function of voter skepticism about government’s societal value, and as for the latter, what’s conservative or Republican about leaving the bill for government at the doorstep of so few? Returning yet again to dependency theorizing, if it’s true that government programs foster varying degrees of addiction to handouts, tax regimes meant to raise revenues on the back of the productive few are explicit in their desire to promote dependence of the masses on a wealthy minority.

If Republicans believe their own rhetoric about the hazards of big government, then it’s necessary that they promote tax plans that maximize economic growth all the while minimizing revenues received by the federal government. Similarly, if they believe their own applause lines about the cruel implications of wealth redistribution, then they should not promote tax schemes that achieve just that.

The present level of tax rates on all income classes is surely worthy of discussion at the moment, as is the proper role of the federal government in our lives. Republicans are in a position to shine in both debates if they shed tired arguments about federal tax receipts and the rich who pay them. These arguments contradict what’s most appealing about Republicans and conservatives, and ultimately work against their stated desire to return federal governance in the U.S. to some modern facsimile of what the Founders envisioned.

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